ByAndrew Downie, CorrespondentAugust 7, 2009

Rio de Janeiro, Brazil — Brazil's congressional inquiry into corruption inside the state-controlled oil company promises sleepless nights for those involved, any number of scandals, and months of political theater that threaten to taint Petrobras, the government of Luiz Inacio Lula da Silva, and the woman he hopes will replace him as president.

The Parliamentary Commission of Inquiry, known by its Portuguese-language acronym CPI, kicked off Thursday and comes at an annoying time for Petrobras, one of Brazil's biggest and best-known companies. In 2007 and 2008 it discovered huge new fields that contain estimated reserves of between 8 and 12 billion barrels of oil. The finds were the biggest in the world for almost a decade.

The oil is stuck below more than 5,000 meters of water, rock, and salt. It is expensive and logistically problematic to extract, but the sheer volume of the fields – and their presence in a country that is stable and has not nationalized petroleum and gas firms – has turned Petrobras into the oil world's new darling.

Companies such as Exxon Mobil, Britain's BP, and Spain's Repsol have come to Brazil to do business with Petrobras, and thousands of smaller firms have joined the black gold rush. While the rest of the world cuts costs, Petrobras is upping its investment and has vowed to spend $174.4 billion between now and 2013.

"Brazil has a lot of oil, and that alone is a reason a lot of people such as direct investors and portfolio investors and oil consuming countries like China see Brazil in a serious oil producer and exporter," says Sergio Torres, a analyst with JP Morgan in New York.

The CPI threatens to put the brakes on that recent good run. CPIs are political tools used to embarrass the government – and this one is no different, Mr. Torres says. With the presidential election just 14 months away, the opposition is starting its attacks early.

The inquiry is ostensibly limited to investigating five issues, including whether Petrobras cheated on tax returns and skimmed from multimillion dollar contracts.

This Senate investigation is particularly timely because the head of the chamber, a key government ally, faces separate allegations of corruption and could be forced to resign. That could shatter Lula's ruling coalition and change the direction of the CPI inquiry.

CPIs have a habit of turning up unexpected findings, and no one can predict what might happen when the opposition gets the bit between its teeth.

A list of obstacles for Petrobras

The obstacles that Petrobras CEO José Sergio Gabrielli must negotiate are political, financial and logistical.

• Any damaging revelations could hurt Dilma Rousseff, the chairwoman of Petrobras's board of directors and Lula's chosen successor. If the company suffers, so could her presidential campaign, analysts say.

• Perhaps the more pressing problem is that the CPI, along with another investigation by the country's Federal Accounting Court, forces Gabrielli and his managers to spend more time defending themselves and less time running the company.

"I will obviously need to combine running the giant that is Petrobras with the need to respond to answer questions," Gabrielli said in an interview. "It demands more of us, of me and of the whole structure."

The strapping oil man insists the company has nothing to hide. He stresses it has cooperated with all investigations and audits.

Still, Lula's Workers' Party did everything possible to stymie the CPI. And contractors privately say the company is grinding to a halt. Officials have stopped sanctioning the normal rolling over of contracts.

"No one expects the CPI to come up with any great findings," says Ricardo Caldas, a political scientist at the University of Brasilia. "But a CPI is like an audit: You can be asked about anything at any time. It's clear that [the company] is putting the brakes on."